A AAA Rating aka Triple A Rating: The highest credit quality given by rating agencies which analyze bonds and long term debt of companies. AIG American International Group: Once the nation’s largest insurance firm, AIG collapsed in September 2008 under the weight of its gamble to insure mortgage-backed securities. A federal government bailout was arranged and then increased as the giant conglomeration posted bigger losses. The bailout of the company drew nationwide outrage when it was learned AIG paid out hundreds of millions of dollars in executive bonuses.
Ameriquest: Once the largest privately held retail mortgage lender in America and the largest subprime lender by volume. The company was headquartered in Orange County, California and in January 2006 Ameriquest reached a $325 million dollar settlement with prosecutors from 49 states and the District of Columbia over allegations of unfair and deceptive lending practices. Ameriquest denied all allegations. Citicorp purchased the remaining assets in September 2007.
Amortization: Process by which the principal loan amount borrowed is paid off, commonly after 30 years.
AMRESCO Residential Credit: Subprime lender, based in Dallas, Texas, that raised capital through investments in the equity market and securitization. AMRESCO filed for Chapter 11 bankruptcy protection in July 2001, citing “significantly reduced cash flows and deterioration in value due to continued increases in delinquencies and projected credit losses” which totalled $133 million.
ARM – Adjustable Rate Mortgage: A variable loan with payments that fluctuate according to an index. There are two kinds: those with, and without, negative amortization. ARM Resets: Subprime lenders lured borrowers to take out adjustable rate mortgages with features called “teasers” that included making lower minimal payments for the first few years before the loan reset to a higher payment schedule.
B Bair, Sheila: Sheila Bair is the 19th Chairman of the Federal Deposit Insurance Corporation, aka FDIC. She was appointed to a five-year term on June 26, 2006 by President George W. Bush, and as a member of the FDIC Board of Directors through July 2013. Bair, along with Federal Reserve Governor Ned Gramlich, tried for more than seven years to alert the Fed to the lack of regulation on subprime lenders. Bair was rebuffed by the lenders themselves when she asked them to allow outside monitors to verify they were in compliance with a code of best practices. She calls herself a lifelong Republican and market advocate. Bair told The Economic Club in New York on April 9, 2009: “We are now in the clean up phase. We need to get in, do the repair work, and get out. And we also must look to how to improve our system for the future.” Born in Kansas on April 3, 1954, Chairman Bair received a bachelor’s degree from the University of Kansas. In 1978, she earned a Juris Doctor degree from the University Of Kansas School Of Law. She went on to work for Senate Majority Leader Robert Dole from 1981 to 1988 as a Research Director, Deputy Counsel and then Counsel. She worked as Commissioner of the Commodity Futures Trading Commission from 1991 to 1995, and served as Assistant Secretary for Financial Institutions at the U.S. Department of Treasury in 2001 and 2002. Before joining the FDIC, Bair worked at the University of Massachusetts-Amherst as the Dean’s Professor of Financial Regulatory Policy for the Isenberg School of Management. Chairman Bair has two children, Preston and Colleen, with husband Scott P. Cooper.
Bank of America aka BofA: Based in Charlotte, North Carolina, Bank of America was already one of the world’s biggest banks when it purchased struggling Countrywide Financial Corp. for $2.5 billion in July 2008, and the world’s largest retail brokerage, Merrill Lynch,in a $48.7 billion stock swap in September 2008. In June 2009, BofA CEO Kenneth Lewis testified he was pressured into the merger by then-Treasury Secretary Hank Paulson and federal regulators, who made clear that if the bank reneged on its promise, they would force his ouster and that of board members at the bank. Members of Congress accused federal regulators of a gross misuse of their power in arranging what Rep. Edolphus Towns (D-NY) called “a shotgun wedding” that cost U.S. taxpayers $20 billion in January 2009. That amount was part of a $45 billion government bailout for BofA. The roots of Bank of America can be traced back to 1784, when John Hancock signed a charter for the Massachusetts Bank, one of the first three commercial banks in the U.S. Over the centuries, the company grew with the acquisition and merger of more than fifty banks, including FleetBoston, MBNA and LaSalle Bank. The Bank of America name was adopted in 1998, when NationsBank acquired California-based Bank of America. In February 2008, Bank of America was added to the Dow Jones Industrial Average. The bank maintains corporate headquarters in Charlotte, North Carolina, and investment banking operations in New York City.
Bass, J. Kyle: Managing member and principal of the Dallas-based hedge fund, Hayman Advisors LP. He is one of the few savvy investors who bet against the mortgage-backed security fever, and made $500 million in less than a year; Bass’s hedge fund soared 600% in just eighteen months. Hayman Advisors LP was formed in December 2005. Previously, Bass worked at Bear Stearns for six years, and at 28, became one of the youngest Senior Managing Directors in the firm’s history. In 2001, Bass left Bear Stearns and joined Legg Mason, where he worked as a Managing Director for four years. Bass was also a managing member of the general partner of Subprime Credit Strategies Fund, LP and Subprime Credit Strategies Fund II, LP, and is a Director of the ABS Credit Derivatives Users Association Inc. and a founding member of the Serengeti Asset Management Advisory Board. In September 2007, Bass testified as an expert witness before the House of Representatives Financial Services Capital Markets Subcommittee, calling subprime credit “the mad cow disease of structured finance.” Bass graduated with honors with a Bachelor of Business Administration in Finance and Real Estate Finance from Texas Christian University in May 1992. He attended TCU on a Division I scholarship for academic achievement and diving.
Bear Stearns: Now a division of JP Morgan, the venerable 85-year-old Bear Stearns was among the nation’s largest underwriters of mortgage bonds, and one of Wall Street’s largest players in the market for CDS, credit default swaps. By selling swaps, Bear bet the subprime home loan market would improve or at least turn out to be healthier than expected. But in June 2007, two internal Bear hedge funds that had been heavily invested in mortgage securities collapsed, eventually triggering widespread panic in the markets in August. It was fueled by speculation amid reports that Bear Stearns’s longtime leader Jimmy Cayne had gone golfing and played bridge during the meltdown. The year 2007 ended with the firm announcing the first loss in its eight-decade history: $854 million, or $6.90 a share, for the fourth quarter, compared to a profit of $563 million, or $4 a share, for the same period in 2006. The firm also said it had written down $1.9 billion of its holdings in mortgages and mortgage-based securities, up from the $1.2 billion expected in November 2007. So, in January 2008, Bear Stearns announced Cayne would step aside as chief executive. Alan Schwartz, previously president, rose to CEO. Despite denials of instability from inside Bear Sterns, the federal government got involved in frantic efforts to stabilize and eventually sell Bear Stearns in March 2008. A weekend of intense and bitter negotiations ended with the Federal Reserve approving a $30 billion credit line to JPMorgan Chase to acquire Bear Stearns. But the price was a meager $2 a share, less than one-tenth its market price. JPMorgan also limited its own exposure by paying only about $270 million in stock, citing the fact that Bear Stearns had run up huge losses on mortgage-backed investments. After further negotiations between the companies and the fed, JPMorgan later agreed to up the bid to $10 a share in stock and to purchase 95 million new shares of Bear Stearns, giving JPMorgan an immediate 39 percent stake in the collapsed brokerage firm. Only 6,500 of the 13,500 Bear employees would keep their jobs.
Bernanke, Ben: Chairman of the Federal Reserve of the United States. He was sworn in on February 1, 2006 and his four-year term will expire on January 31, 2010. His membership in the Board of Governors of the Federal Reserve System runs through January 31, 2020, and he is also Chairman of the Federal Open Market Committee. As a Fed Governor and as Chairman, Bernanke has been a staunch advocate of deep interest rate cuts to extremely low levels to stimulate the economy. Bernanke also has spoken at length about the need for government to act aggressively to prevent deflation, to avoid a repeat of the Great Depression that followed the 1929 stock market crash. Bernanke wrote in an October 2000 article in Foreign Policy that the Fed mistakenly raised interest rates to protect the value of the dollar, which was then based on the gold standard. As interest rates climbed, unemployment surged and prices deflated. He writes that the Fed compounded the problem by standing by as the collapse of the banking system in the early 1930s led to a nationwide credit collapse: “Without these policy blunders by the Federal Reserve, there is little reason to believe that the 1929 crash would have been followed by more than a moderate dip in U.S. economic activity,” Bernanke wrote. Bernanke was born in Augusta, Georgia on December 13, 1953, and was raised in Dillon, South Carolina. The eldest of three children, Bernanke graduated in 1971 as the valedictorian from Dillon High School and achieved a score of 1590 – out of a possible 1600 – on his SAT’s. He received a B.A. in economics in 1975 from Harvard University, graduating summa cum laude, and received a Ph.D. in Economics in 1979 from the Massachusetts Institute of Technology. Bernanke became an Economics professor soon after graduating from MIT. He first started as Assistant Professor of Economics at the Graduate School of Business at Stanford University and then taught at New York University before becoming the Chairman of the Economics Department at Princeton University in 1996. He resigned in 2002. He continued working in economics until he eventually assumed the position of Chairman of the U.S President’s Council of Economic Advisers in January 2005. Ten months later, President George W. Bush nominated him to succeed Alan Greenspan as Chairman of the Federal Reserve. Where Bernanke differs most from Greenspan is in his expressed desire for the Fed to speak more clearly to the public and financial markets about its intentions. As chairman, Bernanke has spoken more plainly in talking about the economy and Fed policy than Greenspan ever did. “We’ve seen in the last two meetings that our words have been far more powerful than our policy decision in terms of changing markets,” Bernanke said in August 2008. Whereas Greenspan would use far more ambiguous language, Bernanke explicitly rejected using mixed signals as a tool. “Ambiguity has its uses but mostly in noncooperative games like poker,” he said at a meeting of Fed Governors in 2003. “Monetary policy is a cooperative game. The whole point is to get financial markets on our side and for them to do some of our work for us. In an environment of low inflation and low interest rates, we need to seek ever greater clarity of communication to the markets and to the public.” Ben Bernanke married his wife, Anna, in 1978 and they have two children, Joel and Alyssa.
Blankfein, Lloyd: Chief Executive Officer and Chairman of the Board of Goldman Sachs. Blankfein assumed the position when Hank Paulson, then CEO of the firm, was nominated by President George W. Bush to be Secretary of the Treasury on May 31, 2006. Blankfein had been President and COO of Goldman Sachs since 2004. Blankfein transformed the company from the world leader in securities trading to a bank-holding company in 2008, but maintained its profitability. Goldman Sachs made $4 billion in profit in betting against the subprime mortgage market, and has continued to make a profit throughout the crisis. Blankfein himself benefited, earning nearly $43 million in salary and stock awards in 2008. In a public mea culpa, Blankfein wrote letters to four U.S. congressmen in June 2009, declaring: “we regret that we participated in the market euphoria and failed to raise a responsible voice.” The letters were sent as Goldman Sachs repaid $10 billion in bailout money from the TARP or Troubled Asset Relief Program. The repayment was aimed at freeing Goldman Sachs from government-imposed restrictions on executive pay for companies that took the government bailout funds. Blankfein was born in the Bronx, New York on September 20, 1954. He was graduated valedictorian from Thomas Jefferson High School, and attended Harvard University, where he earned an A.B. degree in 1975 and his Juris Doctorate in 1978 from Harvard Law School. Before joining Goldman Sachs in 1981, Blankfein worked as a lawyer for the Donova, Leisure, Newton & Irvine firm. In 1994, he was selected to head the Currency and Commodities Division at Goldman Sachs and stayed in that position until 1997, when he served as co-head of Goldman Sachs’ Fixed Income, Currency and Commodities Division (FICC). He rose to the position of Vice Chairman of the firm in April 2002. Blankfein is married to Laura Jacobs and they have three children. BNP Paribas: France’s largest bank, with a growing presence in the United States and Asia. As the banking crisis raged across Europe in August 2008, the bank froze 1.6 billion euros ($2.2 billion) worth of funds, blaming U.S. subprime mortgages for sparking the instability. Although it performed better than its rivals, BNP Paribas lost 56% of its profits when Lehman Brothers and Icelandic banks collapsed in November 2008. BNP Paribas employs 172,300 worldwide including 15,000 in North America.
Brendsel, Leland: Former President and Chief Executive of the Federal Home Loan Mortgage Corporation, aka Freddie Mac, the nation’s second-largest buyer of home loans. Hired in 1982 as Executive Vice President and Chief Financial Officer, Brendsel led Freddie Mac for 18 years until a multi-billion dollar accounting scandal erupted in June 2003. Investigators learned Freddie Mac misstated earnings by $5 billion between 2000 and 2002, artificially inflating some results while reducing others to mask quarterly volatility and meet Wall Street expectations. Brendsel “retired” from Freddie Mac several months into the investigation. The Office of Federal Housing Enterprise Oversight announced charges against Brendsel and Freddie Mac’s former chief financial officer, Vaughn A. Clarke. The regulator accused both Brendsel and Clarke of hiding the manipulation from the company’s board, investors and regulators by omitting and deleting information from reports. The government ultimately fined Freddie Mac a $125 million civil penalty, on top of $50 million to settle securities fraud charges, and decided to withhold more than $50 million in severance from Brendsel. He countersued and in November 2007, reached a $16.4 million settlement over his role in the scandal. He agreed to pay $2.5 million in fines to the government, give back $10.5 million in salary and bonuses and to waive claims against the company for compensation worth $3.4 million. Brendsel was vice president and chief economist of the Federal Home Loan Bank of Des Moines before moving to Freddie Mac. From 1976 to 1978, he was an economist at the Farm Credit Banks in Washington. He graduated with honors from the University of Colorado and received a doctorate in finance from Northwestern University. Brendsel is 69 and is married to Diane Brendsel. Bubble: Coined in December 1996 by Robert Shiller, an economics professor at Yale University and partner at Case Weiss Shiller, during a lunch at the Federal Reserve attended by Chairman Alan Greenspan. Shiller asked Greenspan when was the last time someone in his position warned the public that the stock market had become a bubble, and warned him that stocks had risen to irrational levels. Three days later, he heard Greenspan ponder during a plunge in stock prices whether “irrational exuberance” might be to blame. Nine years later, Shiller warned of the likelihood the housing bubble would burst, citing historical pricing documents which he said show that every housing boom of the last few centuries has been followed by decades in which home values fell relative to inflation. Building Permits: Legal document filed with a municipality in order to allow excavation and/or construction. An increase in building permits and housing starts usually occurs a few months after a reduction in mortgage rates. Permits are not required in all regions of the country, and over time, the level of permits tends to be less than the level of starts.
Bush, George H.W.: George Bush was the 41st President of the United States and the father of President George W. Bush. Born in Milton, Massachusetts, on June 12, 1924, he enlisted on his 18th. Bush was the youngest pilot in the Navy when he received his wings and flew 58 combat missions during World War II. He was shot down by Japanese antiaircraft fire and was rescued from the water by a U.S. submarine. He was awarded the Distinguished Flying Cross for bravery in action. In January 1945, Bush married Barbara Pierce. They had six children– George, Robin (who died as a child), John (known as Jeb), Neil, Marvin, and Dorothy. After graduation from Yale, Bush embarked on a career in the oil industry of West Texas. He followed in the footsteps of his father, Prescott Bush, who was elected a Senator from Connecticut in 1952. Bush served two terms as a Representative to Congress from Texas. Twice he ran unsuccessfully for the Senate. Then he was appointed to a series of high-level positions: Ambassador to the United Nations, Chairman of the Republican National Committee, Chief of the U. S. Liaison Office in the People’s Republic of China, and Director of the Central Intelligence Agency. In 1980 Bush campaigned for the Republican nomination for President. He lost, but was chosen as a running mate by Ronald Reagan. In 1988, Bush won the Republican nomination for President and, with Senator Dan Quayle of Indiana as his running mate, he defeated Massachusetts Governor Michael Dukakis and Senator Lloyd Bentsen in the general election. President Bush sent American troops into Panama to overthrow General Manuel Noriega, who was threatening the security of the canal and the Americans living there. Noriega was brought to the United States for trial as a drug trafficker. In 1990, when Iraqi President Saddam Hussein invaded Kuwait, then threatened to move into Saudi Arabia, Bush rallied the United Nations, the U. S. people, and Congress and sent in 425,000 American troops. They were joined by 118,000 troops from allied nations. After weeks of air and missile bombardment, the 100-hour land battle dubbed “Desert Storm” routed Iraq’s million-man army from Kuwait. But at home, Bush was unable to win the war against a faltering economy, rising violence in inner cities, and continued high deficit spending. In 1992 he lost his bid for reelection to Bill Clinton. Bush celebrated the milestone of his 85th birthday in June 2009 with a tandem parachute jump over his New England hometown of Kennebunkport, Maine. Bush, George W.: George W. Bush was the 43rd President of the United States. Bush is the eldest son of President George H.W. Bush and was sworn into office on January 20, 2001. He went on to serve for two terms after being re-elected in November 2, 2004. Before becoming President, he served as the 46th Governor of the State of Texas from 1995 to 2000. President Bush was born July 6, 1946, in New Haven, Connecticut but grew up in Midland and in Houston, Texas, after his parents decided to move there in 1948. He received a bachelor’s degree in history in 1968 from Yale University and then served as a pilot in the Texas Air National Guard. President Bush went on to attend Harvard Business School and received a Master’s of Business Administration in 1975. He returned to Texas to begin a career in the energy business. In 1978, he ran for his public office, to represent Texas in the House of Representatives, but lost to Kent Hance by a 6 percent margin. He then returned to the oil and gas industries until 1986, when he moved to Washington D.C., to work as a campaign adviser on his father’s successful 1988 Presidential campaign. Soon after, he assembled a group of partners that purchased the Texas Rangers baseball franchise in 1989. President Bush went back to the political scene in 1991, when his father asked him to be an advisor during the 1992 Presidential campaign. Following his father’s defeat, President Bush sought to become Governor of Texas, and on November 8, 1994, he narrowly defeated Democratic incumbent Governor Ann Richards. President Bush was re-elected November 3, 1998, and was the first governor to win back-to-back four year terms in the history of Texas. In August 2000, President Bush won the Republican nomination for president with Dick Cheney as his running mate. He went on to win the Presidency after a close and controversial election that was not decided for more than a month. Vice President Al Gore and Joseph Lieberman won the popular vote, but Bush and Cheney received a majority of the electoral votes. On December 13, 2000, the Supreme Court ruling reversed a Florida Supreme Court decision to recount votes, and Gore conceded the election to Bush the next day. President Bush and Cheney won re-election in 2004 against Democrats John Kerry and John Edwards. In 2001, President Bush won passage of a sweeping plan he called “the cornerstone of my administration:” the establishment of the No Child Left Behind Act, aimed at improving student performance, teacher quality, and to impose national standards. He also implemented free trade agreements with more than a dozen nations. But Bush’s presidency was largely shaped by the events of September 11, 2001, when nearly 3,000 people were killed by terrorists striking on American soil. Within days, Bush named Osama bin Laden as the culprit and in October 2001 launched a war on terror, beginning in Afghanistan. He established new institutions beginning with the Department of Homeland Security, while reforming and reorganizing the way intelligence agencies communicated with each other and the federal government. Bush’s public approval ratings dropped significantly during his second term in the wake of his administration’s shifted the focus of the war to Iraq, because of its response to Hurricane Katrina in 2005, and as the economic crisis led to a global recession in 2008. President Bush is married to former teacher and librarian Laura Bush, who he wed in 1977; they have twin daughters, Jenna and Barbara.
Case-Shiller Index: A value-based measurement of the residential housing market, tracking changes in the value of the residential real estate market in 20 metropolitan regions across the United States. These indices use the repeat sales pricing technique to measure housing markets. First developed by Karl Case and Robert Shiller, this methodology collects data on single-family home re-sales, capturing re-sold sale prices to form sale pairs. This index family consists of 20 regional indices and two composite indices as aggregates of the regions. The metropolitan regional indices are combined to form two composite indices – one comprising 10 of the metro areas, the other comprising all 20 – to serve as measurable monthly benchmarks of the national residential real estate market. The S&P/Case-Shiller Home Price Indices are calculated monthly and published with a two month lag. New index levels are released at 9am EST on the last Tuesday of every month. In addition, the S&P/Case-Shiller U.S. National Home Price Index is a broader composite of single-family home price indices for the nine U.S. Census divisions and is calculated quarterly. The S&P/Case Shiller Indices are calculated by Fiserv, Inc. and is maintained by an Index Committee, whose members include Standard & Poor’s, Fiserv and leading industry experts. It follows a set of published guidelines and policies that provide the transparent methodologies used to maintain the index. The S&P/Case-Shiller Home Price Indices began as a research project in the 1980’s when Karl E. Case and Robert J. Shiller began to construct a methodology to measure housing price movement. They developed the repeat sales pricing technique,still considered the most accurate way to measure this asset class. The methodology measures the movement in price of single-family homes in certain regions. This is done by collecting data on sale prices of specific single-family homes in the region. Each sale price is considered a data point. When a specific home is resold, months or years later, the new sale price is matched to the home’s first sale price. These two data points are called a “sale pair.” The difference in the sale pair is measured and recorded. All the sales pairs in a region are then aggregated into one index. Sales pairs are carefully screened for any data points that would distort the index. These factors include foreclosures, non-arms length transactions (sales between family members) and suspected data errors where the order of magnitude of the change is substantially different from other sales pairs in the region. The indices are designed to measure the change in the price of homes that have not undergone significant positive or negative changes in quality. Sales pairs are assigned weights to account for fluctuations in price that can be attributed to factors like extensive home remodeling, adding a home addition, or extreme neglect. For example, the indices assign smaller weights to sales pairs with large change in sales price relative to the community around them. The assumption is that this change is due to remodeling or neglect. Sales pairs are also weighted based on time intervals between sales. Sales pairs with longer time intervals are given less weight than sales pairs with shorter intervals to account for the probability of physical changes. The accuracy of the S&P/Case-Shiller Home Price Indices is dependent on the accuracy of its data. Case, Karl: Founding partner in the real estate research firm of Fiserv Case Shiller Weiss, Inc. and serves as a member of the Board of Directors of the Mortgage Guaranty Insurance Corporation (MGIC) and of the American Real Estate and Urban Economics Association. Case is also the Katherine Coman and A. Barton Hepburn Professor of Economics at Wellesley College where he has taught for 30 years. Professor Case received his B.A. from Miami University in 1968, spent three years on active duty in the Army, and received his Ph.D. in economics from Harvard University in 1976. Professor Case’s research has been in the areas of real estate, housing and public finance. He is author or co-author of five books including Principles of Economics, Economics and Tax Policy and Property Taxation: The Need for Reform and has published numerous articles in professional journals. Principles of Economics, a basic text co-authored with Ray C. Fair, is in its eighth edition and has been adopted at more than 450 colleges and universities. For the last 25 years, Case’s research has focused on real estate markets and prices. He has authored a number of studies that attempt to isolate the causes and consequences of boom and bust real estate cycles and their relationship to economic performance.
Cayne, James (Jimmy): James Cayne is the former Chief Executive Officer of Bear Stearns Inc. He served in the position from 1993 until January 2008, just months before the firm was acquired in a government-orchestrated emergency sale by JP Morgan Chase. Before becoming Bear Stearns CEO, Cayne was the company’s president. He is also a world-class bridge player. Cayne was born on February 14, 1934. He attended Purdue University but enlisted in the U.S. Army before he could obtain a degree. At times in his life, he had been a taxi driver, a scrap-iron salesman and sold photocopiers. In 1964, Cayne’s first marriage dissolved and he moved to New York City, where he drove a cab for a living while playing bridge professionally. He started playing bridge full time and won his first tournament in 1966. That skill endeared him to his mentor, Alan “Ace” Greenberg, who hired him as a stockbroker for Bear Stearns in 1969. His exceptional bridge skills and connections helped him grow in the firm at a very fast pace, eventually becoming president in 1985 and succeeding Greenberg as CEO in 1993. Cayne assumed the post of Chairman of the Board in 2001. In 2005, he was ranked among the 400 richest Americans listed by Forbes, where he occupied the 384th position. His assets where estimated at $900 million. In 2006, he was the first Wall Street chief to own a company stake worth more than $1 billion. In Cayne’s 40 years with the firm, 15 of them as CEO, Bear Stearns changed from a fiscally conservative traditional Wall Street brokerage house to a publicly-traded world marketplace with a shaky foundation of debt-focused securitization. As Bear Stearns headed toward bankruptcy, Cayne was playing in a bridge tournament in Detroit, golfing and out of touch. In January 2008, Cayne stepped aside as CEO and was replaced by then-president, Alan Schwartz. Shut out from a position at JP Morgan, Cayne sold his stake in the company for $61 million after losing a billion dollars in the collapse of the firm. He is married and has two children.
CBOE – Chicago Board Options Exchange: Among U.S. securities exchanges, CBOE advertises that since it founded the listed options business in 1973, it has been the leader in options volume every single year. In 2008, CBOE options contract volume was an all-time record of 1,193,355,070 contracts (up 26% over the previous year). In 1993, the CBOE asked Robert E. Whaley, then a professor at Duke, to create a new revenue stream: a measurement of market anxiety or investor fear that investors could bet on using futures and options. Whaley devised the VIX, a gauge of trader anxiety that tabulated the premiums paid by investors who buy options tied to the price of the Standard & Poor’s 500-stock index. Whaley compared his invention to a barometer of fire insurance purchases in a neighborhood where an arsonist is on the loose. That neighborhood is Wall Street, where investors are more eager to buy insurance during troubled times, even at the expense of higher than usual premiums. This activity pushes up the level of the VIX; the higher the VIX, the lower the confidence of traders in where the market is headed.
Cityscape Financial: Elmsford, NY-based subprime mortgage lender that from 1995 to 1997, securitized and sold $2.7 billion in loans, mostly home equity loans, in the United States as well as in the United Kingdom. Cityscape’s British subsidiary CMC raked in more than 50% in profits in 1996 on just 26% of sales. Aggressive lending practices, such as high early redemption fees, drew the ire of customers and regulators. In 1997, Cityscape admitted that it found mortgage fraud in a $130 million portfolio bought from a New Jersey source. Then, Moody’s twice downgraded the company’s senior debt. In a year’s time, prompted further by deteriorating business conditions, Cityscape stock plunged to $2.75 and the company filed a Chapter 11 bankruptcy petition in June 1998. A class action lawsuit brought against Cityscape’s CEO Robert Grosser, Executive Vice President Robert Patent and General Counsel Jonah Goldstein, alleged they misrepresented and failed to disclose that a substantial portion of Cityscape’s income was derived by engaging in inappropriate loan and accounting policies in the UK. The suit was settled for $2.3 million in January 2001.
CDOs – Collaterized Debt Obligations: CDOs are diversified, multi-class securities backed by pools of bonds, bank loans, or other assets. These securities funded $380 billion in mortgage loans in 2008. CDOs typically allow securities to be issued with a higher credit rating than the securities used to back the CDOs, such as corporate bonds, commercial loans, asset-backed securities, residential mortgage-backed securities, commercial mortgage-backed securities, and emerging market debt. These securities are typically divided into several classes, or bond tranches, that have differing levels of credit tolerances and typically contain at least one class of investment-grade bonds. Most CDO issues are structured in a way that enables the senior bond classes and mezzanine classes to receive investment-grade credit ratings; credit risk is shifted to the most junior class of securities. If any defaults occur in the assets backing a CDO, the senior bond classes are first in line to receive principal and interest payments, followed by the mezzanine classes and finally by the lowest rated (or nonrated) class, which is known as the equity tranche.
CME – Chicago Mercantile Exchange: The Chicago Mercantile Exchange is a self-regulating futures exchange owned and operated by CME group and headquartered in Chicago, Illinois. CME Group Inc. also owns and operates CBOT, aka the Chicago Board of Trade. In 2009, CME competed with Intercontinental Exchange for a stake in the lucrative credit default swap market. Central clearing of CDS trades is seen as essential to eliminating risks related to the potential failure of a large counterparty. Fears of margin losses helped trigger a run on Bear Stearns and Lehman Brothers and sparked government calls for mandatory clearing of standardized CDS trades. By “clearing” CDSs, the CME becomes a counterparty in every CDS trade and manages the credit exposures from the time the trade is made to when the trade is officially settled. Clearing also ensures delivery of the securities and makes sure trades are settled legally and according to the rules of the market, even if the buyer or seller becomes insolvent. It is a lucrative line of business: CME recorded $458 million in clearing and transaction fee revenue in the second quarter of 2008, up 9% from the same period in 2007. Conforming Loans: Loans that “conform” to the guidelines set up by the large national mortgage stock market, referred to as the secondary market. Money to fund first mortgages comes from special stocks funded in the secondary market that conform to the specific guidelines, which include maximum loan amounts, maximum loan to value ratio, “A” rated credit borrowers and accurate home appraisals.
Countrywide Financial: Once the country’s biggest mortgage lender, acquired by Bank of America in 2008 for $2.5 billion in stock and folded into BofA. Co-founded by Angelo Mozilo in Calabasas, California 40 years ago, Countrywide’s expansion into the subprime market helped fuel the housing boom by offering loans to high-risk borrowers. But as home values began dropping in 2007 and borrower defaults skyrocketed, Countrywide’s lending practices came under the spotlight of legislators, regulators and consumer advocates. Countrywide’s stock price collapsed in 2007, falling 80 percent, wiping out $20 billion in market value. The U.S. government provided Countrywide $5.2 billion to keep the company viable, even after BofA’s purchase. In 2009, the bank rebranded Countrywide as Bank of America Home Loans to shed any connection to its toxic past.
Cox, Christopher: Christopher Cox is the 28th Chairman of the Securities and Exchange Commission. President George W. Bush appointed Cox on June 2, 2005 and he was sworn in on August 3, 2005. Before being selected for the position, Cox had been a Republican member of the House of Representatives representing California’s 48th district since 1989. He resigned the SEC Chairmanship on January 20, 2009, at the end of the Bush administration. Cox was born on October 16, 1952, in St. Paul, Minnesota and attended St. Thomas Academy in Mendota Heights. In 1973, he earned a Bachelor of Arts degree from the University of Southern California in a three-year accelerated course. Cox then attended Harvard University, where he earned a Master of Business Administration degree from Harvard Business School and a Juris Doctor degree from Harvard Law School in 1977. He went on to work at Lathan & Walking, an international law firm where he started as an associate and thenbecame a partner. He stayed with the firm until 1986 as a member of the firm’s national management. He took some time off during 1982 and 1983 to teach federal income tax at Harvard Business School. In 1986, Cox served under President Reagan as Senior Associate Counsel to the President and in 1988 he was elected to represent California’s 40th District in the House of Representatives. His district changed numbers in 1993 and became the 47th District and again in 2003, when it was renumbered as the 48th District. In his tenure in congress, Cox served in the Majority Leadership of House of Representatives and was Chairman of different committees including the House Policy Committee, the Committee on Homeland Security, and the Select Committee on U.S. National Security, among others. Christopher Cox and his wife Rebecca have three children.
Credit Ratings: A credit rating measures the creditworthiness of a financial institution and analyzes the ability of how a financial institution repays the loans it has taken, and also the amount of interest that is accrued. The credit rating of a financial institution also influences the interest rates on the bonds and debentures issued by those institutions. A high credit rating for a financial services provider or bond issuer means the amount of interest paid to the investors is low because they consider the investment to be less risky. A low credit rating given to a financial services provider or bond issuer means the amount of interest paid to the investors is high because the investors consider the investment to be more risky and the issuer tries to compensate the degree of risk by paying a higher rate of interest. There are 1,000 credit rating agencies, including A.M. Best, Moody’s, Fitch Ratings and Standard & Poor’s Ratings. Consumers also have credit ratings, now known as credit scores, that help banks and lenders determine their creditworthiness. The best known of these evaluations are outsourced to Fair Isaac Scoring Service, which rates their prospects on the FICO scale. The lender will also likely order a credit report from one of the large national credit reporting agencies to verify sources of income, debt and payment history.
Credit, Collateral, Character, aka Three C’s: Three things creditors examine to determine creditworthiness: credit, collateral and character. Credit is a borrower’s ability to repay based on income and current debt. Lenders want to see current income that is high enough to cover current debts with money left over. They want to know that a consumer earns more than they owe, known as positive net worth. Collateral can be property or other valuables used as security to guarantee the repayment of a loan, something of value that could be sold in case the consumer defaults on the loan. Character is defined as the responsible handling of past debt as well as stability in keeping a job and a residence, typically at least a year, the longer the better, without foreclosure or bankruptcy.
CDS – Credit Default Swaps: Credit Default Swaps are contracts often compared to insurance policies that promise to cover losses on certain securities in the event of a default. Typically, these securities include municipal bonds, corporate debt and mortgage securities and are sold by banks, hedge funds and other financial institutions. The buyer of the credit default insurance pays premiums over a period of time with the assurance that any losses will be covered if a default happens. But while banks and insurance companies are regulated and their savings are guaranteed, the credit swaps market are not currently regulated and the money can vanish in the hands of a less creditworthy buyer. Contracts are traded, or “swapped,” from investor to investor without outside oversight of those trades that would ensure the buyer has the resources to cover the losses if the security defaults. And both the insured and the insurer can buy and sell these instruments. The top 25 banks in the U.S. held more than $13 trillion in credit default swaps, acting as either the insured or insurer at the end of the third quarter of 2007. The market for credit-default swaps was largely unknown until the downfall of Bear Stearns and the federal rescue of insurer American International Group.